Is a personal loan cheaper than car dealer finance?


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When it comes to buying a new car, it can be tough to figure out whether dealer finance or a one off payment is the best option

More often than not, we take out car finance directly through the dealership. In some cases, though, it could work out cheaper in the long run to get a personal loan to buy a car. Most, if not all, dealers will earn commission through selling these types of loans making them more expensive for buyers.

Dealers sometimes offer special 0% finance offers that no personal loan is ever going to beat - so if you spot one (and read the small print carefully first, of course), snap it up and you could save yourself hundreds, if not thousands of pounds.

If you’re not getting a 0% deal, though, you could be missing a trick and paying through the nose by not shopping around. However, the 0% finance deal might not always be all it’s cracked up to be… Make sure you price up the car in a few different garages and dealerships. If a garage is offering a 0% finance deal, they could well have hiked up the price of the vehicle to cover this.

How car loans work

Most dealer finance packages work one of two ways: Personal Contract Purchase (PCP) and Hire Purchase (HP).

Personal Contract Purchase

These are the most popular way of getting a new car because they offer the cheapest monthly re-payments. You put down a deposit, agree a mileage limit and the term of the agreement. The dealer then calculates your monthly repayments, also taking into account a big chunk of the car’s value that will be left over, unpaid, at the end of the agreement. This is often called the ‘balloon’ payment. This is because the dealer knows roughly what the car will be worth when the agreement is over.

The idea is that at the end of your agreement, you can do one of three things:

1) Hand the car back and walk away

2) Pay off the unpaid balloon and own the car

3) Use the difference between the unpaid balloon and what it’s worth (the ‘equity’) as the deposit on a new car and agreement.

The balloon is what makes your repayments smaller - your monthly repayments are just covering the cost of the car’s depreciation. It’s worthwhile considering this option if you want to get a new car regularly (by selecting option three, above), but it means you never finish paying for your car, so it feels more like you’re renting your car.

If you change your mind and decide for option two - owning the car – you may end up paying more overall, because the interest on PCP deals is often higher than a Hire Purchase agreement or personal loan.

Hire Purchase and personal loans

HP is much more easily compared to a personal loan. You simply put down whatever you can afford as a deposit, then pay off the balance on a fixed monthly repayment until the full price of the loan is paid.

Hire Purchase agreements tend to have a lower APR rates than PCP deals, but you could get an even lower rate by using a personal loan provider.

In essence, HP finance and personal loans repay the loan in the same way. Dealers sometimes rely on customers not realising this, and not checking if they could get a better deal by financing through their bank or a specialist provider like Admiral.

Choosing a personal loan could mean you can afford to upgrade to a better model for the same monthly cost as a cheaper model on Hire Purchase. You can set the length of your agreement (up to 60 months with Admiral), and there are no mileage limits, set-up fees or document transfer fees when the agreement comes to an end - just fixed, predictable repayments.

You can get an indicative quote for your monthly repayments online from Admiral today.

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